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Sunday, 10 November 2013

Turning the key in Islamic finance is mind over matter

The buzz that has gathered around Sharia-compliant finance — following Dubai’s plan to establish itself as the capital of the Islamic economy, and the UK’s announcement of a sovereign sukuk and extension of its task force to develop the sector — denotes not only a growth industry offering opportunity, but also the prospect of reformist change.

Inadvertently, though, it reminds us that many of the associated themes have remained unhelpfully unchanged. A certain status quo prevails in the calls for improved transparency, governance and standardisation across the industry and its competing centres and regions; similarly in the uncertainties and arguments about the scholastic dimension of what is otherwise a conversation between governments and markets, and comparative regimes.

The relevance of religion and academia brings a whole set of question marks into the discussion, and the need to pursue answers by the sharing of ideas with some degree of common objective.

As suggested last week, that dispersed dialogue remains very fragmented, not least in the varying voices from the Gulf and from its main rival and potential partner, Malaysia. It naturally appears that compromises have to be found.

Sometimes it takes a relative outsider to the main fray spontaneously to identify the friction and a means to resolve it, as was noticeably the case in London when governor of the central bank of Nigeria Sanusi Lamido Sanusi suggested from the podium: “I don’t think harmonisation is about a ‘one-size-fits-all’ policy. I think there are structures in place that have broken down some of the barriers that are mostly communication- and understanding-based. The conversation has to move [on]; we must get out of this mindset.”

It was a telling contribution, to the effect that, to hit its moving target, the Islamic finance sector needs to be customer-oriented, market-driven, and realistic. “As long as we accept a need for pragmatism and balanced rules,” he proposed, “we’ll find a way forward”.

Whether that kind of invocation can break circles of confusion and impasse depends on those who are really the leading insiders — the key players in the contest, from the Gulf and Malaysia especially — to agree on its validity. Time will tell.

Meanwhile, amidst all the noise attending the key debates, and the repetitive sound bites of those marketing for business, there are other nuggets of wisdom available among the printed declarations of sources in the know.

These observations, inevitably often couched in the regular speech patterns of those in positions of responsibility, can serve usefully to inform the paths ahead, if they can be sifted from the public relations agendas. Drilling down into the literature from the UK’s summit late last month unveils insights of that sort.

One example actually resonates beyond the confines of Islamic finance, even of broader ethical or socially-responsible finance, into not only conventional finance but what could be called conventional economics.

Economic reality

As president of the Islamic Development Bank Mohammad Ali Al Madani noted, “There has been growing realisation among policymakers as well as the general public that many of the past and present financial crises have their origins in excessive debt and the resultant de-link of finance from economic reality.”

Unfortunately, not only does much of the current rebound in the global economy seem to rely on the resumption of escalating household borrowing and consumption, but a substantial weight of policy advice seems to suggest that exercising such leverage in both monetary and fiscal terms is integral to growth and well-being.

That would seem to miscast the basis of prosperity as being in, succinctly, the “quantity of demand” rather than “quality of supply”, but also reflects the legacy of indebtedness already accumulated, that needs to be indulged and ever so gently worked out globally to avoid further disaster.

Another worthwhile note is that, from an investment perspective, again there is a potential commonality between Sharia-compliance and non-compliance, in terms of expectations. Realistically, Islamic institutions are not only in a competitive marketplace for funds in relation to depositors but also in delivering wealth creation to investors.

Competitiveness

As author Nigel Gibson says, research indicates that, provided it is deemed compliant, few customers from Muslim countries “admit to having been influenced by the structure of a product or service”, but instead require, specifically in respect of insurance vehicles, “a decent return”. It is, arguably, probably as well to accept that notion.

Likewise, governor of the central bank of Malaysia Zeti Akhtar Aziz has been quoted as finding Islamic finance growing so much as a sustainable form of funding precisely because of its competitiveness.

Whether that claim can be borne out across the board may depend on the ability of the dealmakers to streamline the process of documentation and generally accepted Sharia board approval.

The latest signs are, as for the sector as a whole, that the spirit among practitioners and prevailing authorities is comparatively willing.

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